ACCESS TO FINANCE OF SMES IN MAURITIUS

Prema Kinita SHIBCHURN Kusmani SEETLOO Ashvin RAMGOOLAM

BSc. (Hons.) Management with Law (2012)
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Outline
Abstract Background Study

Introduction
Literature Review Methodology and Research Design Data Analysis Recommendations Conclusions

Outline
Abstract
Background Study

Introduction
Literature Review

Methodology and Research Design

Data Analysis Recommendations Conclusions

Abstract
This study investigated the determinants of capital structure of small and medium enterprises (SMEs) in Mauritius. Bring forward hypothesis which are related to the sources of finance (retained profits, bank loan and Grants or Subsidised Bank Loan) of the SMEs to that of their age, size and profitability. the study recommended that SMEs, commercial banks and the Mauritian government take measures to improve access to capital by SMEs.

Outline
Abstract

Background Study
Introduction
Literature Review

Methodology and Research Design

Data Analysis Recommendations Conclusions

Profile of SMEs in Mauritius

In 2009, it now amounted to some 100,000 enterprises and employs some 45 percent of the workforce compared to 36 per cent in 2005. In 2007, the number of small production units (establishments and itinerant units) operating in the Island of Mauritius and Island of Rodrigues was estimated at 91,980, compared to 74,930 in 2002, that is

an increase of 23%.
17% of small business owners have registered businesses 79% of small business owners are traders (sell products) o Of these, 62% sell their products in the same form they bought it (they do not add any value) 21% of small business owners are service providers. Of these, 5% render professional services (e.g. accountants, doctors, lawyers, etc.) Two-thirds of small business owners needed start-up money and most of these funds came from own sources, with 37% claiming to borrow from other sources. Only 5% percent of small business owners claim to have current borrowings or loans for their business and 39% claim to save for business

purposes.
Awareness of support for small business owners is extremely low with 74% of business owners unable to name any organisation that gives help and advice to small businesses

Background Study Despite their significant importance and contribution of SMEs to economic growth, SMEs face numerous challenges in accessing credit facilities from commercial banks. Access to loans among SMEs has become a serious constraint towards the development of SMEs in Mauritius. This results in high rates of business failure. This study investigates the extent of access to credit and support by SMEs in Mauritius.

SME Financing Landscape Supply

Financing Needs - Supply

Corporates
Medium

Banks/Financial Institutions Private Equity/Venture Capitalists Khula, IDC, NEF Own resources

enterprises

Medium

enterprises

Small enterprises

Small enterprises

Banks & Corporates

Khula & PDCs Own & family resources

Micro enterprises Micro enterprises Survivalist enterprises

Microlenders & Banks SAMAF & PDCs Own & family resources Microlenders SAMAF

Survivalist enterprises

SME Financiers
Longterm
CAPITAL MARKETS INVESTMENT BANKS DEVELOPMENT FINANCE INSTITUTIONS MORTGAGE PROVIDERS

Long

TERM M - term

TER Medium

Medium

MICRO-FINANCE INSTITUTIONS CONSUMPTION LENDERS

GAP

COMMERCIAL BANKS

Short -term

STOKVELS, BURIAL SOCIETIES MONEY-LENDERS

Short
Micro

Micro

Small

Small

Medium

Medium

Large

Large

Source: Roussos and Ferrandi (2008)

TRANSACTION SIZE
TRANSACTION SIZE

SMME Business Confidence Index

80 70
71.01

60 64.89 50

66.37 63.71 56.65 55.76 51.59 51.21 52.84 52.43 47.03 40.55 40.43 48.9 50.79 55.28

Business Confidence among owners and managers of South Africas SMMEs remains fragile, although there was a slight in the 3rd of the year. The country is still recovering from the effects of the global economic crisis and the look for the future looks positive

40 30 20 10

Source: South African SMME Business Confidence Index Report

Outline

Introduction SMME financing landscape Factors inhibiting small business growth Access to finance challenges lenders perspective Role of Development Financial Institutions in Financing SMEs Bridging the Gap Concluding remarks

Factors inhibiting small business growth

None/nothing Dont know Other Lack of customers Corruption Access to land Skills and education Customs/trade regulations Harassment by officials Weather/natural disasters Business licensing Electricity Transportation Crime and theft Competition Access to/cost of finance Space to operate

19% 5% 1% 1% 1% 1% 2% 2% 2% 3% 3% 3% 4% 7% 13% 14% 16%

Source: FinScope South Africa Small Business Survey 2010

Outline

Introduction SMME financing landscape Factors inhibiting small business growth Challenges in Financing SMEs lenders perspective Role of Development Financial Institutions in Financing SMEs Concluding remarks

Challenges in Financing SMEs Lenders perspective

Unclear Business Strategy Lack of Entrepreneur /Business Skills Inability to provide proper financial records of business

Viability of business
Insufficient Information Integrity/Credit Worthiness of Entrepreneur Application falls Outside Investment Criteria of Funding Institution

Weak capability among SME entrepreneurs in managing functional areas of business

Size of Deal Acceptable assets for collateral are limited Lack of owners contribution

SMEs do not prepare financial statements or if any, are not acceptable to creditors

Outline

Introduction SMME financing landscape Factors inhibiting small business growth Access to finance challenges lenders perspective Role of Development Financial Institutions in Financing SMEs Concluding remarks

Role of DFIs in financing SMEs

State-owned development finance institutions exist in order to address specific market failures, by taking higher levels of risk (lower return for a specific level of risk), crowding in the private sector and moving on to new neglected territories once the gaps have been narrowed. DFIs have to balance their development focus with commercial reality because they have

to be financially sustainable in the long term. This has implications for their investment
criteria, pricing, portfolio mix, risk management, systems and skills. Rather than just driving volume, DFIs have to focus on the sustainability of the enterprises they support, not only to preserve their own sustainability but also to ensure that the jobs created are sustainable and the entrepreneurs supported thrive, thus contributing to general economic prosperity.

Bridging the Gap

Create a One-Stop-Shop for SMEs to access services (business registration, tax

clearance certificates etc)

Promote business linkages between SMEs and large corporations towards integration into national and global value chains

Business incubation

Strong networking amongst entrepreneurs

Conducting regular training seminars for creating awareness and capacity building of SME entrepreneurs

Khula Background

Khula, is a development finance institution (DFI) reporting to the Department of Trade and Industry (the dti), with an independent Board of Directors

Khula was established in 1996 and its mandate derives from the dti White Paper on the National

Strategy for the Development of Small Business (1995).

The decision to establish Khula as a wholesale rather than a retail institution was taken after considering the following factors: The role of the State is to create an enabling environment rather than to participate directly. Government backed guarantees would assure Commercial banks and other financial institutions and get them to participate in the SMME sector. As a wholesale financier; Khula works through a network of partners inter alia Commercial Banks; non-bank RFIs; and other partners to ensure that SMMEs have access to finance.

Khulas Mandate is focused on three key areas

Promote access to finance

Access to finance for SMEs

Development impact

Create sustainable SMEs; in the mainstream economy, thereby contribute to economic development

Financial sustainability
Long-term objective

Khulas Activities Summarised

Product & Activity
Business loans Khula gives loans to Retail Financial Intermediaries (RFIs) who further on lend to SMEs. However, through Khula Direct loans will be extended directly. Credit indemnities Khula assists SMEs to access private sector funding (through banks & RFIs) by indemnifying their loans Joint Ventures Khula partners with the private & public sector to finance SMEs. Funds Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by an experienced Fund Manager who does not contribute their own capital to the fund.

Mentorship Programme - Mentors are used for both pre- and post loan interventions as well as capacity building to the RFIs. Currently Khula has entered into an agreement with Institute of Business Advisors of Southern Africa (IBASA) to manage the mentors database.
Properties - is mostly located in previously disadvantaged areas. It provides operating space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away from operating in informal set ups to a much more formal environment.

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Financing Partners

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Concluding Remarks

Khula is a development finance institution dedicated to the needs of small business Primary role of DFIs is to address specific market failures and crowd-in private sector

There is a need to bridge the information gap between lenders and SMEs Prospects for SME sector are good and there is renewed focus on SMEs by both the

public and private sector

Future of the financing needs of the SMEs lies with strong public-private sector partnerships

Khula is always looking for corporate partners who provide the opportunity to finance

SMEs

THANK YOU
Khula Client Liaison Centre number

08600 KHULA (54852)

Website - http://www.khula.org.za

Email - helpline@khula.org.za